It’s a Ponzi Scheme
Ramesh Ponnuru is wrong in the New York Times discussion where he claims that one reason that Social Security shouldn’t be considered a full-blown Ponzi scheme is because it is involuntary.
Think of it this way: Suppose Bernie Madoff requested that he be allowed to do community service as part of his prison sentence, in the form of administering the Social Securty program.
In the Madoff-run Social Securtiy program, planning for the future would be based on 10% annual returns on money “invested” in the “trust fund” that he would promise to deliver. And since the “trust fund” would be doing so well, there’d be no need for any Social Security reform. In fact, the aniticpated surplus promised by Madoff would be so large, the government would be able to resume its practice of a few years prior and began immediately to spend social security payroll taxes on other Federal programs, in anticipation of the new investment revenues, while all current retirees continued to receive their checks. Madoff would also need some money for operating expenses, like a fleet of private jets to take him between the 7 or 8 beachfront mansions he would need to be able to monitor the program from various locations in the United States.
But suppose that in reality — shocking as this may sound — Madoff applied the same financial practices that made him infamous to the new funds he had access to, i.e. instead of investing the money, he simply used the money coming in from newer program participants (current workers mandated by law to send him their money) to pay off longer-term participants (current retirees) and took some for himself.
Voluntary versus involuntary has no bearing on the issue. Madoff would still be running the same kind of Ponzi scheme he was running before. He just would have found a new way to “convince” people to give him a part of their incomes.